The Question of Governance in the Privatisation of Infrastructure

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Hilton A. McDavid


In the Caribbean, particularly Guyana and Jamaica, the boundaries of the state started to shift to privatisation with the adapting of their structural adjustment programmes and the conditionalities. In discussing pre-privatisation and post-privatisation governance, it is important that we realise that legitimacy is not primarily about ownership but about control, regardless of whether this is effected through regulation, or direct ownership or whether economic activity should be guided by the market, subject to only general competition (Newberry 2000).

The greatest detriment to private participation in infrastructure is the regulatory environment. If the regulation is unlimited in scope, unclear in operation and inclined towards micromanagement, private investors will be detracted and simply seek a more compatible environment.

The regulatory regime must be limited, transparent, fair and consistent and government must keep its promises. Investors are now not only wary of direct expropriation, but also of administrative or incremental expropriation, depriving the private firm of legitimate recovery of costs and profits. The conduct of the regulator has to be such that he is considered an important referee where the objective is to optimise output, rather than reflecting the interest of the political groups. The regulation of infrastructure has to deal with asset specificity on the part of the firm, bounded rationality on the part of the regulation, and opportunism by both parties. In addition, it has to protect agreements against intervention by other parties. A major threat here is not just directly from the government, but treaties and domestic and international pressure groups may cause the need for legislation in areas such as safety and environmental issues after the signing of the compact that could significantly affect the operations of the entity. In summary, a government can effect privatisation by committing itself credibly to post-privatisation governance that serves the public interest.

Finally, Government macroeconomic policy that will encourage the creation of employment is essential to governance of privatisation in the Caribbean context, as jobs produce consumers who can pay user fees. This holds true whether we are discussing potable water supply where there is a great need or toll roads, which may be dependent on higher incomes for the purchase of transportation services and vehicles.

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